Get Your Macro Fix w. Joey Politano
Author of Apricitas Economics: Data-Driven Insights into Economics, Business, Finance & Public Policy
“People tend to study the economy in the same way they would study the inner workings of a car. They treat the economy as a complex mechanical process that should be understood as an interlocking system of individual parts. But it’s a social process, and the base units are people".
Joey Politano is the author of Apricitas Economics, a newsletter that covers everything related to economics, business, finance & public policy through a data-driven lens. The prose is crisp, the analysis is sublime, and each edition exquisitely breaks through the noise to conclude with a compelling verdict. In a world where the understanding of macro is increasingly convoluted, Joey is able to separate the wheat from the chaff, as it pertains to economic data. Put differently, he is able to hone in on what is important and break it down exceptionally well. The reason I conduct guest interviews is three-parted. One, to amplify the voices of those who I feel ought to be heard. Two, to create an interesting and informative conversation for readers to digest. And three, a selfish endeavour whereby I get to pick the brains of people I want to learn from.
As such, I took the full opportunity to ask Joey a range of questions about himself, the macro backdrop, and what he is pondering on a forward-looking basis as it relates to recessions, inflation, central bank policy, the nuances between the US and Europe, and a whole lot more. I hope you will enjoy this as much as I did, and a huge thanks tofor being so gracious with his time.
Conor: Welcome Joey, and thank you for taking some time to let me pick your brain this morning. A few months ago I remarked that “there is a special place in heaven for people who can simplify the understanding of economic policy as well as Joey does” when I was commenting on a piece you wrote about UK government bonds. With so much focus on the macro in recent years (has there ever not been?) we have witnessed some awesome individual reporters such as yourself get noticed for being able to eloquently explain what’s going on in a way the layman can understand. That is both why I enjoy reading your work, and why I wanted to shine a light on it today.
For the readers who may not be aware of what it is you do, could you possibly give them a breakdown of what Apricitas Economics is all about?
Joey: Thanks Conor! I’m happy you asked me to share some virtual time and space with you for this Q&A, and I am very flattered by the kind words. Macro has definitely taken more of the limelight than at any point since 2008—and it’s no wonder with how many massive overlapping economic shifts there are today!
Apricitas Economics is my substack newsletter where I take a data-driven view on everything that’s going on in today’s global macro landscape. I’ve written about the real value of inflation expectations, America’s car shortage, and (as you mentioned before) the gilt market meltdown in the UK. I think my best work comes from being able to dig deep into the weeds of macro data—something that has been all too important given the confusing nature of today’s economy. I helped catch a significant overestimation of US wage data before it was officially revised down, and right now I am working on a piece dissecting the complicated data on US rent growth.
Conor: Following on from that, it would be great to learn a little more about yourself, what was the catalyst that inspired the creation of Apricitas, and maybe a little context on what factors led you to make the jump and pursue it full-time earlier this year. Huge congrats by the way.
Joey: Thank you! Yes, as Conor mentioned I decided to make Apricitas my full-time job just under two months ago, and I have been truly overwhelmed by the positive response since then! For context, I graduated from the George Washington University in 2019 and almost immediately set off to go do volunteer work with the Peace Corps in Uganda. When COVID hit all the volunteers were sent back to the US and I scrambled to get a job back in DC. I ended up working for the Federal government for almost two years, and it was about nine months into that job when I started Apricitas. When I first started writing it was mostly just to refine my econ communications skills, build on the data analysis knowledge I had from school, and interject to the macro debates that were ongoing at the time. I set a self-imposed rule that I would publish every Saturday at 9:30am EST just to force myself to write something consistently—and I am proud to say I have stuck to that deadline ever since!
Nine months or so ago, I realized that the amount I had to say was outpacing the amount of time I had to write. The newsletter had a lot of momentum behind it so I realized the only way I was going to be able to say everything I wanted was to take the leap and try to make writing my full-time job. Though readers support I’m happy to say that I’ve crossed the threshold where the newsletter is self-sufficient, and I am closing in on my previous salary rather quickly!
Conor: Very glad to hear that, well done. Joey, you are a relatively young chap. This was a question I had always planned to ask because I saw a response that(a fellow young macro commentator) gave to someone who attempted to call her out for not having lived through a strong dollar environment before; implying something to the effect of “what would you know?”. Despite the fact we are living through one right now…. she eloquently outlined the nuances between experience and knowledge. I think both you and Kyla have demonstrated that youth is not a hindrance in your respective output.
There is merit to the notion that some things are better learned through lived-experienced, but it’s not always the case, and discrimination based on age alone is sadly a common facet of the investment world. Is this something you have ever had to deal with, and what are your thoughts on the matter?
Joey: I think the “what would you know—you haven’t lived through this before!” critique is extremely funny right now. There’s a massive global pandemic! Unless you were alive in 1918 you also haven’t lived through this before! We’re all figuring this one out as we go. I am relatively young—24 as of this August—but I have never really experienced any similar instance of age discrimination by virtue of being a white guy. Still, my pitch for “why you should care about what young people say” is two-fold:
There is, as Kyla said, a difference between experience and knowledge. People have a tendency to simultaneously say “the future does not conform to the notions of the past” and then go searching through the past for comparable situations so they can understand the future. Obviously, the past has important lessons—but it is often not even the people who experienced the past who can glean those lessons! Plus, nobody is going to have expert knowledge of every subject matter—the best people I’ve met are humble in their approach toward others’ knowledge and looking to learn more than to debunk.
We are increasingly living in a gerontocracy—a government and society of the old. Look at the average age of politicians, CEOs, academics, and other societal leaders over the last twenty years and you’re basically only going to see an upward trend. A lot of this is the simple ageing of the total US population, but a downstream consequence is that basically, every major institution is going to be increasingly biased away from internalizing the experiences of young people. This isn’t all about fairness and representation (though those are extremely important!) it’s a good pure business decision—unless you make a conscious effort to seek out the knowledge and opinions of young people you’re going to be missing important information and you might wind up investing in Quibi instead of TikTok.
Conor: A dramatic pull forward in earnings, shifting consumer habits, lack of mobility, revenge travel, broken supply chains, easing followed by tightening, inflation…. the last two years have witnessed a whirlwind of factors that have warped the data across everything from corporate earnings, to travel volumes, to demand & supply, and the macro picture. You remark that your intent is to seek truth through evidence and provide nuance (in this economy?). Cutting through the noise, how have you been finding nuance & clarity in this environment when there appears to be so much contradictory evidence out there?
Joey: It is honestly really, really hard—the global economy is intensely complicated at the best of times and has gotten much more complicated since 2020. When in doubt it’s best to go back to basics and build up from there—how is the data constructed? How is it collected? Where does it come from, and how is it revised? From there you can identify what are robust sources and what are flimsy sources, and then you can try to tease out signals from the noise.
For example, it was obvious late last year that inflation was bound to be high and persistent in 2022 because of the lags inherent in how the US government measures rent prices. It became obvious to me that real income-derived output measures were being overestimated when I dug into how the wage data is calculated and extrapolated. Knowing how the sausage is made is the only way to truly figure out what the sausage actually means, to butcher the metaphor.
Conor: Many layers to that sausage joke, it wasn’t the wurst I’ve ever heard, kudos. In that same vein, if you had to boil down your thoughts on the global macro picture over the next 12 -24 months into a handful of paragraphs what would be your take? What are the handful of KPIs that investors should be paying attention to?
Joey: The next 1-2 years are first and foremost about inflation—how fast will inflation fall, how much pain it will take to get inflation down, and how uncertain policy remains amidst high inflation. On the financial side, I constantly look at inflation breakevens (the difference between inflation-adjusted and nominal treasury yields), which provide the best picture of market-based expectations for medium and long run inflation. For financial conditions and recession risks, I look at the Chicago Fed’s Financial Conditions index and Corporate High Yield Credit Spreads, and for macro volatility the MOVE interest rate volatility index is good. In terms of the literal inflation data itself, it’s best to split things into food, energy, cars, housing, and then everything else. I look at wholesale data from Manheim and Black Book as leading indicators for used cars and trucks, and I look at the new lease rental data from Zillow and ApartmentList as leading indicators for housing inflation. Plus there is a super-core inflation indicator (all items less food, energy, shelter, and used vehicles) that is also worth keeping an eye on.
Conor: Are there any factors in the macro-outlook that you feel are being overlooked, or not discussed as often, at the moment? If so, could you possibly break down what those might be?
Joey: I think my big topline worry has been labor market data—the business surveys have all been good so far this year, but the household survey has shown functionally zero growth since March. I think there’s this pretty pervasive narrative that the labor market hasn’t turned the corner yet or is “stubbornly strong,” and while compared to the move in interest rates the labor market remains pretty strong I think people are overstating the case when looking only at establishment survey data—I’m still worried we could be in the middle of a significant hiring slowdown, and the household data usually stalls like this before it starts falling. Separately I think you have a bit of an interesting daisy chain of events going on with energy prices and capacity development. Lots of electricity in the US comes from natural gas, much of which is being sold abroad now amidst high global demand in the wake of the Russian invasion of Ukraine. As a result, we’re now getting a ton more investment in US gas export capacity and a bunch of global investment in new electricity production. US solar capacity is projected to increase nearly 50% between now and the end of 2023, and US battery capacity tripled in 2021!
Conor: Perhaps it’s just my social circle, but there doesn’t appear to be a great deal of fear amongst investors despite being in the midst of a fairly destructive bear market. Michael Batnick recently shared a chart (below) and remarked that “The S&P 500 has never experienced a decline this deep with unemployment below 4%. This goes a long way toward explaining why people seem okay despite a bear market, rising prices, and rising interest rates.”
I’d be interested to hear your interpretation of the above chart.
Joey: I will say first that I do think the ~vibes~ of the drawdown have been relatively optimistic. At least in my circle, more people are cracking jokes about their portfolio performance than are genuinely worried. Maybe that’s bias from the length of the post-2008 bull run, maybe it’s that I and most of my friends are index fund types, or maybe it’s faith that inflation is a short-run problem with little long-term implications. Either way, I do agree people seem chiller than expected about the drawdown. To the chart itself, I will say a few things. The first is that real interest rates have been declining due to structural factors for decades and had been at historic lows before the current bout of inflation. It is somewhat natural we would see a large decrease in equity valuations when real interest rates are moving off historic lows, even if the move in interest rates did not coincide with a rise in unemployment.
The second thing I will say is that while we haven’t seen employment move anywhere yet the current FOMC projections are for the unemployment rate to rise by 1% in the next year. Meanwhile, prime-age employment rates are still marginally below pre-pandemic averages and 2% below the 1998 peak—so the state of the labor market isn’t quite as good as the unemployment data alone suggests.
Conor: The dance between inflation rates and inflation suppression. Naturally, central banks realise that persistently high inflation is disastrous for an economy and the Fed has shown they are willing to exert a little pain if it means stomping inflation in its tracks. But there comes a time when a central bank may be too overzealous in their inflation-fighting regime, pushing their respective economy into a deeper-than-anticipated recession. For the readers, could you possibly break down the difference between a soft landing and a hard landing, what factors might lead to either outcome, and how you feel the central banks across the US, EU, and UK are handling this predicament as things stand?
Joey: There’s a concept economics has borrowed from physics called hysteresis—a permanent shift in long-run outcomes caused by a temporary shock. The entire development of Silicon Valley, for example, is arguably just a downstream consequence of decisions made in Defense Department research and development spending during World War II. But people mostly bring up hysteresis in the context of economic recessions. When you look at the period after the 2008 recession you basically see a permanent downward pull in employment, wage growth, productivity growth, housing construction, manufacturing output, and so so much more. When people worry about a “hard landing” to me they’re worried about hysteresis—to what extent does the economy bruise and to what extent does it scar?
With the notable exception of Japan, almost every high-income nation is dealing with some high level of above-target inflation right now. To varying degrees, nearly all central banks also acknowledge that a recession is either likely or necessary to get inflation down. But the situation feels a lot worse across the pond than in the US—the Fed is dealing with a much hotter economy than the ECB or Bank of England, and has been able to tighten fairly aggressively without completely breaking things (yet). But credit conditions and real interest rates are mostly global, and so the ECB and BoE have to chase the Fed to a larger extent than vice-versa both to fight domestic inflation and to prevent currency depreciation. European economies are much weaker overall—British GDP levels are below pre-COVID levels and shrinking, French and German GDP levels are only slightly above pre-COVID levels and stagnating—and are dealing with the brunt of the global energy crisis. Plus the Eurozone likely has the most fragile fiscal and monetary system among high-income nations—so while I worry a lot about the US I worry even more about Europe.
Conor: I tend to agree, as an exiled European myself. Moving on, it’s a fairly widely held belief that the stock market is a leading indicator, whilst most metrics associated with the economy are lagging. Put differently, the stock market tends to recover before the economy does. On the whole, the market is a forward-pricing mechanism, pricing out the next 12-24 months in the present day. What happens when there is overzealous fear or optimism, is that the forward-looking range becomes much shorter; the market begins to price in the next 1-6 months based on whatever trepidation or equanimity it faces. I tend to visualise this as a pendulum which swings back and forth.
With everyone assuming a recession in Europe and the UK by next year, and the US to possibly follow, just how much of the world’s economic woes do you feel are priced into markets right now? And as a more positive follow up, once the trough of our economic woes has passed, what are some of the tell tale signs investors should be looking out for to get a sense of an economy that is the early stages of recovery and eventual return to prosperity?
Joey: People are rightly scared about the state of the economy in the medium term, and a lot of that fear is definitely showing up in asset prices right now. At the time of writing the S&P 500 is down 17% on the year (and excluding energy it’s down 20%!). Still, the thing people should keep in mind is that the market is pricing in a lot of uncertainty right now. It’s not just that recession risks are higher, but also that outcome variance is higher—and so when you’re thinking about moves in the market it’s worth trying to separate out how much comes from a deteriorating outlook and how much comes from a rise in uncertainty.
Obviously, the first answer is getting inflation back down to a normal level—basically, everything is secondary to the future path of inflation. Beyond that, I would look for upward movements in real fixed investment and a recovery in housing construction for signs of broader economic strength. Reduced volatility in equities, bonds, and commodities would also be a good sign, as would a pickup in heavy truck and car sales. Loosening credit conditions (when coupled with inflation) would be the ideal soft landing scenario. And I always keep an eye on aggregate employment but for specific sectors, I look at residential building, truck transportation, and manufacturing.
Conor: There are a few analogies I like to recite to myself from time to time. One, as a commentary on life and remaining positive, is “if you don’t laugh you’ll cry”. Another, as it relates to the stock market and macro is “on the way up, they are investors. On the way down, they become economists''. Expressed only half in jest, there is this notion that “the stock market is not the economy” and vis a vis. But the economy so often affects the stock market. Lynch, amongst others, has been known to say that the time spent assessing the economy is time wasted. The caveat here is that this largely depends on an investor’s time horizon and where they reside in the world (not every economy is as “stable” as some might be in the West).
Do you believe that investors should pay close attention to the macro environment over the long term? If so, what would be your advice as it relates to incorporating the study of macro into one’s process? As an added bonus, if you’d like to spice things up, I’d be interested to hear your rebuttal to those who say macro should be ignored outright.
Joey: It’s funny because most of the work I do is backwards—I am using movements in the stock market to assess movements in the economic outlook. I don’t make my own investment allocation decisions based on my macro outlook (I don’t actually make investment allocation decisions at all #VT) and when writing I intentionally leave any of the downstream investment decision-making to my readers’ discretion. My pitch on why it matters for investing, though, is that the broad currents of the economy filter through to basically every facet of corporate America. In my experience, the best kind of analysts are the ones who can put together broad economic information with narrow company/industry-specific information in their analysis. I don’t see them as structurally opposed ways of looking at the world as much as two halves of a difficult-to-grasp whole.
But also, while I do think they are important, I don’t think stock market investment allocation decisions are the be-all-end-all use of valuable economic information. Almost everyone has to make economic decisions in their own life—about picking a job, buying a home, or borrowing money—and macroeconomic information is a critical input to those decisions. A lot of my work is also targeted towards people who need to make internal planning decisions within governments or private enterprises, and those decisions are arguably more important than judgments about asset prices. If, say, the executives at major US automakers had correctly forecasted the rapid rebound in demand after the initial shock of the pandemic then they wouldn’t have underproduced cars so badly in 2020/2021 and we wouldn’t be stuck in quite as bad a car shortage as we have today! That’s a decision based on economic information that is extremely important but isn’t strictly about asset allocation.
Conor: For those looking to get a stronger grasp of economics, perhaps specifically macro, what advice would you give to them? Any resources you found useful yourself early on?
Joey: This is a difficult question—I have a conventional undergraduate economic education but I genuinely feel that college didn’t do much beyond setting up an (essential) baseline level of knowledge that I built upon later.
Conor: As a fellow undergraduate of economics, I concur.
Joey: My generic advice is that creating and iterating are the best ways to learn. I get that it sounds like homework (and in a lot of ways it is) but the best path forward in most disciplines is to keep challenging yourself to the research of gradually-increasing complexity and learning from your mistakes as you go forward. A lot of what I learned about econ came from wanting to answer a deeper question and then travelling down learning paths that I would have never discovered otherwise. My specific advice is that I read a lot of books and newsletters in my spare time—a lot of academics will publish books that do a great job of summarizing in-depth research for a broad audience. Poor Economics (micro and aid economics), How the World Got Rich (the origins of economic growth), and Streets of Gold (US immigration) are all great examples. Plus I love to read newsletters to keep up with economic news in a more in-depth way (Matt Klein’s The Overshoot, Kyla Scanlon's kyla’s Newsletter, and the Financial Times' Alphaville are all great).
One last thing—people tend to study the economy in the same way they would study the inner workings of a car. They treat the economy as a complex mechanical process that should be understood as an interlocking system of individual parts. But it’s a social process, and the base units are people. You interact with the economy every day, and so the best way to learn about it is usually to build on your own experiences and decisions until you can understand the bigger picture.
Conor: Great analogy there. Joey, I just want to say that I have thoroughly enjoyed your answers today, and I am wishing you every success. To wrap things up, where can readers find you and your work, and do you have any concluding items you’d like to say?
Thanks for reading,